House Prices Are Going Nowhere (except down)

For years, the system encouraged high house prices and large loans. There were huge incentives to borrow money, and low starter rates meant that buyers could leverage up and dramatically increase their profits. Imagine. You have nothing and no job. You borrow 300,000 and buy a big house. You sell it in five years for 600,000. You've doubled your money with a massive tax free gain. The massive housing boom of the early 21st century was the first time people in Britain have really been offered free money. No one seemed to notice that there is something curiously wrong (not to say self-deluding) about buying a property entirely with someone else's money and then convincing yourself that you have bought your own home.

The banks played along with this because they wanted the fees and the interest on the big loans. How could anyone lose? House prices would always rise. It was the tulip bulb game. Everyone wanted prices to keep rising. The Government made money out of taxes (such as stamp duty) and rising prices made people feel rich. Many re-mortgaged and spent the money on cars, second homes, huge television sets. And all this helped keep the economy growing and made Brown look like a genius.

Much the same thing was happening in America, and American bankers, not content with merely making millions, hit on a new wheeze - securitisation. They mixed all the mortgages up into a big mess and sold portions to gullible bankers in other countries (such as the UK). The ratings agencies, who were being paid by the banks, said these new products were all wonderful AAA investments. No one much cared because everyone, politicians, banks, rating agencies and buyers all assumed house prices would only go up because that's what they wanted to believe. Right at the bottom of this teetering tower of financial jiggery pokery lay absurd examples of reckless lending. A couple of strawberry pickers with a joint gross income of $600 a week each were allowed to buy a $720,000 house and given a mortgage with monthly payments of $5,378.

The UK's economy was destroyed by Gordon Brown with a little help from his rich pals in the banking trade. But the trigger was the collapse of the house price bubble in America which led to the collapse of a lot of complex financial derivatives which were built on the idea of mixing up and re-selling large mortgages sold to people who couldn't afford them. And that particular problem isn't over yet.

American house prices are still falling and the market there is loaded with unsold houses. And if the prices continue to fall (the average price in 2010 for a house in detroit was down to $10,000) there will be a second serious attack of the heeby jeebies among banks, and bankers will again be screaming for help (in the shape of lorry loads of free taxpayer cash).

And the bubble in the UK was always much, much bigger (and more dangerous) than the American bubble. The British index of house prices rose, in real terms, from 100 in 1890 to 110 by the end of 20th century. In other words, house prices only just beat inflation. Then, by 2006, after just six more years, the index had rocketed to 199. That is an award winning bubble.

In 2009, Gordon the Moron announced that there would be no more 100% mortgages. He might as well have announced that there would be no more steam engines. There were no 100% mortgages. He should have made his brave announcement in 2003. It might have done some good then.

But, helped along by the Government, things just got worse. By January 2010, mortgage rates for new loans were the lowest in recorded history. So, the country was in trouble because of all the debt. And the banks, some of which are bankrupt and owned by taxpayers, were lending money at the lowest ever rates.

By May 2010, house prices in the UK were, much to the bewilderment of people just about everywhere else on the planet, still absurdly high. They had, indeed, actually continued to rise during the crisis because the Government interfered with the normal, healthy process (most notably by lowering interest rates and thereby transferring money from savers to spenders but also by providing greedy people who had borrowed too much with taxpayer funded support).

The Government even used taxpayers' money to compulsorily purchase 400,000 perfectly sound and well-built Victorian homes in the north of England in order to increase the value of the houses left remaining. (One official excuse was that old houses are expensive to adapt to modern environmental regulations.) Many of the demolished houses are now simply derelict plots that no one wants to build on. And even if new homes are built, who builds houses these days as good as the Victorians and Edwardians did? How many will last 150 years? Even councils often charge more to rent out old houses because they are better made and make better homes. The majority of houses built today are so poorly built that they are unlikely to last more than 30 years. (A fact which makes a nonsense of the fact that house prices keep going up, instead of, like second-hand cars, losing value as the years go by.)

In the run up to the 2010 May election, Brown's Government was proud of the fact that house prices hadn't fallen but this was rather like saying the drunk has stayed drunk because we have kept giving him booze. The house price bubble was kept up because the Labour Party (in a desperate attempt to influence people and win votes) kept pumping in air and sticking on patches whenever there seemed to be any chance of a collapse.

In truth, the rise in prices which took place in 2009 and much of 2010, a rise which looked like a bounce or recovery, was due solely to the fact that there was very little property on the market and so there were more buyers than sellers. When there are more buyers than sellers, the price always rises. There was little property on the market because the Government was keeping interest rates low to help to protect people who had bought houses they couldn't afford.

The problem is that the support, in all its various forms, has to stop eventually and the longer it all goes on for the more painful the hangover is going to be. Naturally, by the time the Brown stuff hits the fan, Britain's worst ever Chancellor and Prime Minister, world-class hypocrite and war criminal, hopes to be enjoying some of the hugely profitable perks enjoyed by his predecessor.

When house values eventually fall (which they will when the mass of people realise that the British economy is stuffed and that unemployment and interest rates are going to rise, rise and rise again) and more and more people struggle with negative equity there will doubtless be a flood of repossessions, with many people simply choosing to go bankrupt rather than be hounded by banks trying to get their money back.

In early March 2010, the Greek government had to pay 6.25% to borrow 4.5 billion. If the British government has to pay anything like that, mortgage rates will go to 10-15% and millions of people will lose their homes.

House prices are nowhere near their long-term average. On the contrary, they are still in a bubble. When prices of anything go into a bubble and the bubble finally bursts, prices go into decline and fall below the long-term average. My guess? House prices have at least another 30% to fall. And they could go down further than that. House prices always go up too much and then, when the bubble bursts, they go down too much. The coalition government's rise in capital gains tax may well trigger thousands of sales by second home owners and buy to let owners. And banks which still carry thousands of bad debts on their books, and which have been reluctant to evict house `owners' because every time they do so they crystallise a loss, will do so when prices start to fall.

By the time inflation is taken into account I would be very surprised if anyone made much money out of house prices in the next decade. If a house price is the same in 2020 as it is now (and I think that's probably the best people can hope for) then the owner will have lost money because of inflation. If house prices rise at all before then it will be because inflation has soared.

House prices may or may not crash (I still think that there has to be a crash) but my certainty is that they won't be much, if any, higher in 2020 than they are today (less if you count inflation). The falling currency will mean that expensive houses in London will be cheap for foreigners. But will rich foreigners want to live in a broken society with constant strikes, rioting in the streets, high taxes and more and more rules? (At the moment three quarters of all homes in London are sold to foreigners. Many come to the UK because Britain is one of the world's most attractive countries in the world for money launderers, tax dodgers and thieves - as long as they weren't born in Britain.)

There is an 80% chance of a house price crash of 50% or more before 2020.

Anyone currently buying residential property as an investment is, in my opinion, barking.

Copyright Vernon Coleman 2011